Story Of Wealth Management
Source:
20 Dec 2008
Christopher Tan
The Business Times
Banks are a fiduciary and should place customers’ interests ahead of shareholders’. Banks are
for transaction, not advice
Once upon a time, on a sunny island in South-east Asia, lived more than four million people. The
government took care of the people and the people trusted their leaders. Although outsiders were
often jealous, and scoffed at it being a nanny state, it was the best model then for a young but
growing nation.
The leaders planned for everything. Who you should marry, who your neighbour should be, how
many children you should have, what language you should speak. Whatever the leadership did,
the people believed in them and followed. When chewing gum was banned, the people only had
them when they went overseas. When bird flu hit the country, people continued to eat poultry,
because the leaders said it was safe to eat them. When the leaders said they will live beyond 85
years old and there is a need to plan for their financial life, the people followed.
Such was the trust between the leaders and their followers. The people depended on their
leaders and submitted to them. So despite it being just a little red dot on the map, the country
grew to become one of the richest nations in the world.
The earlier generation lived a simple life. They earned a salary, spent within their means and
were careful never to be in debts unnecessarily. They were, after all, Asians. They were good
savers and often go to the local banks to open a simple savings account to place a deposit or do
some business transactions.
Then one day, some smart people in the banks decided that this business model is too slow in
bringing in profits. So they began selling investment products in the name of wealth management
and financial planning, in line with what the government is encouraging: Take charge of your
financial future. By selling investment products, they will receive lucrative front-end sales
commissions and recurring streams of trail commissions, year after year.
But how do you get busy people who come into the banks for a simple transaction to buy
investment products? The smart people came up with a bright idea: ‘When our customers do their
transaction at the counter, ask them whether they are happy with the low interest rate they are
receiving from their deposits. Most will say no. We will then tell them that we have a better
product for them that give great upside potential but limited downside risk. That will interest them.
Once they show interest, we will get them to sit at our comfortable wealth management area and
have our relationship managers sell to them. To entice them further, offer them a free gift. The
more they buy the more expensive gift they will get. Anyway, we are using part of the
commissions we earn from them to buy the gift. We will still make a good profit. The entire sales
process can be very fast. To cover ourselves legally, get them to answer some simple questions,
add them up and tell them the product suit their risk appetite. If they sign, we are covered. The
smart people were right. Tonnes of products (along with the free gifts) were sold.
But the smart people were not satisfied. ‘How can we make more money?’ they thought. They
came up with another bright idea. ‘We have now made money by getting them to save and invest.
Let’s make more money by getting them to spend their future money!’ So they started organising
road shows all over Singapore to sell credit cards. They even enticed students in campuses (who
hadn’t earned an income) to sign up for credit cards. To make even more money, they sent
cheques to customers and encouraged them to use the cheques to buy what they liked.
Telemarketers called the people every day and encouraged them to make use of the credit
facilities to indulge themselves. The idea was simple: Enjoy first, pay later.
This went on for many years. Times were good during that period. The global economy was
booming and the stock markets were skyrocketing. More and more complicated products (along
with the free gifts) left the shelves of the banks. More and more people were spending beyond
their means. The banks became richer, more powerful and the smart people received fat bonuses.
Everyone was happy.
The year is 2008. Lehman Brothers has fallen. AIG went to the Fed for help and Merrill Lynch
sold itself to Bank of America. A financial crisis second only to the Great Depression is in full
force. Many have lost money buying products they never really understood. Many have over
extended and are in serious debt. Fingers are pointing all over the place. People expressed
shock that their leaders allowed such a thing to happen and blamed the banks for mis-selling.
Banks said the customers went in with open eyes (remember they signed the questionnaire?).
Leaders said the people should know that if they want higher returns, they should take more risks.
The people are sad. They have lost their hard-earned money. Many lamented: ‘How would we
know? We thought if it is from the banks, governed by our leaders, it would be safe.’
Unfortunately, there is no ‘happily ever after’ ending to this story. The moral of the story is:
Although we have high trust in our government as they have taken care of our every need, don’t
over-rely on them. It is time we grow up and make our own judgment.
Banks are not the place to get financial advice. Their platform is a flawed one. One department is
getting you to spend your future money; another is getting you to save. That is not the principle of
good financial planning. To give good advice, you must know your need for the product, your
ability to bear the risk and determine your willingness to bear the risks. That requires a thorough
understanding of your assets and liabilities, your income and expenses and your goals in life.
That requires at least 30 hours of discussion and analysis. You only have half an hour in the bank.
How can you get good advice?
Take care of your children; they are being influenced to spend future money, which is wrong.
Otherwise, we will be building a generation of spenders.
Banks are a fiduciary and should place customers’ interests ahead of shareholders’. Banks are
for transaction, not advice.
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